Key Takeaways
- Only your medical expenses count: IVF procedures, fertility medications, and medical travel for intended parents are deductible. Surrogate compensation, agency fees, and the surrogate’s medical costs are not.
- The 7.5% AGI threshold matters: You can only deduct medical expenses exceeding 7.5% of your adjusted gross income, and only if itemizing beats the standard deduction (~$14,600 single / ~$29,200 married filing jointly).
- December 31 is the hard deadline: Expenses must be paid, not just billed, by year-end to qualify for 2025 deductions. Credit card charges count on the charge date.
- Documentation determines success: Without itemized invoices, mileage logs, and proof of payment dates, legitimate deductions fail IRS scrutiny. Organize records now.
- California HSAs create complications: Unlike federal treatment, California doesn’t recognize HSA contributions as deductible and taxes HSA earnings, requiring careful Schedule CA reconciliation.
Surrogacy transforms lives, but it also generates complex tax questions that intended parents must address before the calendar year ends. The December 31 deadline looms large for California families navigating fertility treatments, IVF procedures, and surrogacy arrangements in Los Angeles. Understanding which expenses qualify for deductions, and which don’t, can save thousands of dollars while avoiding costly IRS audits.
Recent rulings have clarified the bright line between deductible and non-deductible surrogacy costs, yet confusion persists among intended parents who want to maximize legitimate tax benefits without crossing into prohibited territory. This guide cuts through the complexity with research-backed answers, actionable steps, and clear documentation requirements to help you optimize your end-of-year surrogacy finances before the deadline.
December 31 is your critical deadline. All deductible surrogacy expenses must be paid within the tax year to qualify for that year’s deductions. Under IRC Section 213, medical expenses exceeding 7.5% of your adjusted gross income (AGI) may be deductible, but only if they’re for you, your spouse, or your dependent. Third-party costs don’t qualify.
The bottom line: Your fertility treatment deductions are allowed. Your surrogate’s costs are not.
What Surrogacy Costs Are Actually Deductible (And Which Aren’t)?
The IRS has four strict requirements for medical expense deductions. The expense must:
- diagnose, cure, mitigate, treat, or prevent disease,
- affect the structure or function of the body,
- not be reimbursed by insurance, and
- be paid during the tax year.
Most surrogacy expenses California fail the deductibility test. Recent IRS rulings, Magdalin v. Commissioner and PLR 202114001, confirmed that third-party expenses (surrogate compensation, agency fees, surrogate’s medical bills) are not deductible medical expenses for intended parents.
| Expense Category | Example | Deductible? | Why/Why Not | Documentation Needed |
| IVF procedures on intended parents | Egg retrieval, sperm collection, embryo transfer | ✅ YES | Directly affects taxpayer’s body | Provider invoices, medical records |
| Fertility medications | IVF meds, prescribed vitamins | ✅ YES | Prescribed for intended parent | Pharmacy receipts, Rx labels |
| Embryo creation & testing | PGT/PGS testing, lab fees | ✅ YES | Part of intended parent’s treatment | Lab invoices, physician orders |
| Embryo storage | Annual storage fees | ⚠️ MAYBE | If medically necessary for ongoing treatment | Storage invoices, medical necessity letter |
| Medical travel – Intended parents | Mileage, airfare, lodging | ✅ YES | For intended parent’s medical appointments | Mileage log, receipts (lodging capped at ~$50/night per person) |
| Surrogate compensation | Base pay, additional payments | ❌ NO | Third-party payment, not medical | Keep records for legal purposes only |
| Surrogate’s medical bills | Prenatal care, delivery, hospital | ❌ NO | Third-party medical expenses (Magdalin v. Commissioner) | Keep for coordination only |
| Surrogate’s insurance premiums | ACA/private health insurance | ❌ NO | Third-party insurance | Premium payment records |
| Surrogate’s medications | Prenatal vitamins, prescriptions | ❌ NO | Third-party medical supplies | Receipts for records only |
| Agency fees | Matching, coordination, support | ❌ NO | Not medical procedures (IRS guidance) | Service agreements |
| Legal fees | Surrogacy agreement, parentage orders | ❌ NO | Personal/contractual, not medical | Itemized legal bills |
| Egg donor compensation | Donor payments | ❌ NO | Third-party payment (PLR 202114001) | Payment records |
Understanding The 7.5% AGI Floor And When Itemizing Makes Sense
Only medical expenses exceeding 7.5% of your AGI are deductible. If your AGI is $100,000, you must exceed $7,500 in qualified medical expenses before any deduction applies. Understanding these intended parent tax benefits helps you plan strategically.
Calculate Your Potential Deduction:
| Your Situation | Calculation | Result |
| Projected 2025 AGI | Example: $100,000 | |
| 7.5% Floor | $100,000 × 7.5% | = $7,500 |
| Qualified Medical Expenses Paid | IVF, meds, travel | Example: $25,000 |
| Less: Insurance Reimbursements | What insurance paid | Example: -$5,000 |
| Net Qualified Medical | $25,000 – $5,000 | = $20,000 |
| Amount OVER Floor | $20,000 – $7,500 | = $12,500 deductible |
Should you itemize? Add your medical deduction ($12,500) to other itemized deductions (state/local taxes, mortgage interest, charitable contributions). Compare this total to the 2025 standard deduction (~$14,600 single / ~$29,200 married filing jointly). Itemize only if your total exceeds the standard deduction.
Critical timing rule: Expenses must be paid, not just billed, by December 31. Credit card charges count on the charge date, not when you pay the bill.
California-Specific Tax Considerations
California generally mirrors federal medical expense deductions with the same 7.5% AGI floor. Most expenses flow through from the federal Schedule A to the California Schedule CA (540). When navigating surrogacy tax deductions California, state-specific rules add complexity.
The Major California Exception Involves HSAs:
| Issue | Federal Treatment | California Treatment | Impact |
| HSA contributions | Tax-deductible | NOT recognized – must add back | Increases CA taxable income |
| HSA earnings | Tax-free | Taxable | Increases CA tax |
| HSA distributions for medical expenses | Tax-free | May need adjustment | Complex reconciliation on Schedule CA |
FSA/HRA accounts: California conforms to federal treatment. Reimbursements from these accounts reduce your deductible medical expenses; no double-dipping allowed.
Year-End Action Steps To Maximize Deductions Before December 31
Time is running out to optimize your 2025 tax deductions. Follow these five steps to maximize legitimate deductions and avoid wasting money on non-deductible expenses.
Step 1: Calculate Your Current Position
Total all qualified medical expenses paid January through November. Calculate your 7.5% AGI floor (AGI × 0.075). Determine the gap to the threshold. If you’re close, strategic year-end spending may help. If you’re far below or already well above, additional spending won’t change your tax outcome.
Step 2: Prepay Eligible Expenses (If Close To Threshold)
If you’re near the 7.5% floor, consider paying before December 31:
✅ Upcoming IVF cycle fees
✅ Embryo storage invoices for next year
✅ Fertility medications with valid prescriptions
✅ Outstanding clinic bills for your own procedures
What NOT to prepay (won’t help):
❌ Surrogate compensation
❌ Agency fees
❌ Legal retainers
Step 3: Maximize Medical Travel Documentation
Before December 31, gather complete records: mileage log (date, destination, medical purpose, miles), hotel receipts for medical travel (capped at ~$50/night per person), airfare receipts for fertility appointments, and parking/toll receipts. The 2025 IRS medical mileage rate is 21 cents per mile.
Step 4: Coordinate FSA Claims
Submit all eligible expenses to your FSA before your plan’s year-end deadline. Remember: FSA reimbursements reduce your itemized medical deduction; don’t double-count the same expense.
Step 5: Run Final Itemization Analysis
Before spending more, calculate your total itemized deductions: medical expenses over 7.5% floor, plus SALT (capped at $10,000), plus mortgage interest, plus charitable contributions. Compare to the standard deduction (~$14,600 single / ~$29,200 married filing jointly). Only spend more on medical expenses if it pushes you over the standard deduction threshold. Financing options may help you strategically time payments.
Essential Documentation For Your Year-End Tax Folder
Proper documentation protects your deductions. Without receipts, logs, and proof of payment, the IRS can disallow legitimate deductions. Organize now to avoid scrambling during tax season.
For Deductible Expenses:
✅ Itemized invoices from fertility clinics (showing procedures, dates, amounts)
✅ Prescription labels and pharmacy receipts
✅ Letters of medical necessity from physicians
✅ Credit card statements/canceled checks showing payment dates
✅ Mileage log with all required elements
✅ Hotel receipts correlated to medical appointment dates
✅ Insurance EOBs (Explanation of Benefits)
✅ Records of reimbursements received
For Non-Deductible Expenses (Keep For Legal/Contract Purposes):
Surrogate compensation payment records, agency agreements and invoices, legal fees and contracts, and surrogate insurance payment records. While these aren’t deductible, maintain them for contract compliance, legal protection, audit trail documentation, and potential future law changes.
Common Mistakes To Avoid
These four errors trigger audits and cost intended parents thousands in penalties. Avoid them entirely.
Mistake #1: Claiming Third-Party Costs
Surrogate compensation, medical bills, and insurance are NOT deductible. Magdalin v. Commissioner and PLR 202114001 are unambiguous; this creates high audit risk.
Mistake #2: Double-Counting Reimbursements
Insurance or FSA reimbursements must reduce your deduction. Track carefully to avoid over-claiming.
Mistake #3: Poor Documentation
Missing mileage logs, no receipts for lodging, no proof of payment dates, and inadequate medical necessity letters all disqualify legitimate deductions. The IRS requires contemporaneous records; you can’t recreate them during an audit.
Mistake #4: Missing The December 31 Payment Deadline
January payments don’t count for this tax year. Credit card charges count on the charge date, not the payment due date. Confirm payment processing before year-end.
Frequently Asked Questions
Can I deduct embryo storage paid this year?
Possibly, if it’s medically necessary as part of your ongoing treatment. Keep storage invoices and a physician’s letter explaining medical necessity.
What about travel, mine vs. the surrogate’s?
YOUR travel to YOUR medical appointments is deductible. The surrogate’s travel is NOT deductible by you (third-party expense).
What’s the 2025 medical mileage rate?
21 cents per mile. Must keep a detailed mileage log with dates, destinations, medical purposes, and miles driven.
Can I deduct legal fees for parentage orders?
Generally, NO, these are personal/family law matters, not medical expenses.
Can I split expenses with my spouse/partner in California?
California is a community property state; expenses are generally treated as paid equally by both spouses. Coordinate with your tax preparer.
What if my surrogate is in another state?
Doesn’t change deductibility rules; expenses must still be for YOUR medical care to qualify.
Your Year-End Tax Checklist
The next few weeks determine your 2025 tax outcome. Start today by gathering all medical receipts and invoices, then calculate your AGI and 7.5% floor to identify the gap between current expenses and threshold. This week, complete your mileage log for all medical travel, request outstanding invoices from your fertility clinic, organize receipts chronologically, and run an itemization versus standard deduction comparison.
Before December 31, pay eligible expenses if you’re near the threshold, submit FSA claims, finalize all payment processing, confirm credit card charges have posted, and create an organized tax folder with all documentation. Focus on documenting and claiming expenses for procedures you received, don’t risk an audit by claiming surrogate, agency, or legal costs.
The IRS is clear: third-party expenses don’t qualify. Consult IRS Publication 502, California Schedule CA (540) instructions, and IRC Section 213 for official guidance. When in doubt, work with a tax professional experienced in fertility and surrogacy taxation before December 31.
Need guidance on your surrogacy journey? Contact Southern California Surrogacy for professional support through every step of the process.
